The Insolvency Service has recently published its interim report (the "Report") which considers the three permanent measures that were introduced pursuant to the Corporate Insolvency and Governance Act 2020 ("CIGA"). For further details on the temporary and permanent measures introduced pursuant to CIGA, see our previous update.
The report looks at the implementation of the following measures:
- the restructuring plan under Part 26A of the Companies Act 2006 (the "Companies Act");
- the standalone moratorium under Part A1 of the Insolvency Act 1986 (the "Act"); and
- the restriction on ipso facto termination clauses under s.233B of the Act.
On the whole, the measures have been broadly welcomed by stakeholders and are considered to have assisted in the rescue of companies as going concerns.
The restructuring plan
The restructuring plan has been used successfully in cases where a scheme of arrangement alone would not have been effective.
What has worked?
- Existing scheme case law - The pre-existing body of case law in relation to schemes of arrangement has provided a useful foundation for the courts when assessing restructuring plan proposals.
- Removal of numerosity requirement – A restructuring plan will be approved by creditors or members if 75 per cent. in value of those voting in each class vote in favour of the plan. The absence of a numerosity requirement has been seen as a positive development.
- Cross-class cram down - The cross-class cramdown mechanism has effectively addressed the blocking of otherwise well-supported restructuring proposals. We have seen cross-class cramdown being used successfully in cases where a scheme of arrangement would previously not have been effective (for example, in Re Amicus Finance plc [2021] EWCH 3036 (Ch)).
What could be improved?
- Cost of implementing a restructuring plan - Restructuring plans are seen as being very costly and time-consuming and therefore inappropriate for SMEs. The costs associated with a restructuring plan were cited by many as the reason for not using a restructuring plan where it would otherwise have been appropriate. The costs of a restructuring plan might be reduced by:
- Dispensing with the requirement for two separate court hearings and having those proposals that are not complex or contentious dealt with at a single court hearing by an Insolvency and Companies Court judge; or
- Formulating a standardised form of restructuring plan, akin to the R3 standardised form for SME CVAs.
- Ability of creditors to effectively challenge proposals - Creditors might consider a restructuring plan to be "effectively unchallengeable" due to the costs associated with a challenge. There are also questions around the adequacy of access to information about the company and the proposed restructuring plan. In Re Virgin Atlantic Airways Ltd [2020] EWHC 2191 (Ch) at [67], it was suggested that at the time when creditors receive sufficient detail as to the proposals, the restructuring plan may be so well-formulated that they might find it extremely difficult to propose a viable alternative to the court. Proposals are often dependent upon valuation exercises and based on commercially sensitive information that might not be available to creditors in the first instance. Where creditors do have this information, the time between the convening and sanction hearings might not grant them sufficient time to refute the evidence. This issue might be resolved through requiring increased transparency and disclosure of information to provide creditors with ample opportunity to review and challenge proposals.
- International perspective - Cross-class cramdown was a necessary introduction in order for the UK restructuring regime to remain competitive as against other jurisdictions. The legislation could go further in order to expressly include extra territorial effect of sanctioned plans.
The moratorium
The moratorium has offered eligible companies sufficient time and breathing space to consider a rescue as a going concern, but remains a "largely untapped resource".
What has worked?
- Sufficient time and breathing space for companies to consider a rescue – The initial 20-business day moratorium period, with provision for extension, offers sufficient time for a company to consider a rescue plan.
- Encourages continued financial support – The financial services exclusion is designed to encourage lenders to continue to support struggling businesses. Companies should, where possible, ensure they have the support of their lenders. If a lender is not supportive of a moratorium, and opts to accelerate their debt, a monitor would be obliged to bring the moratorium to an end if the company was unable to repay the debt.
What could be improved?
- Eligibility and qualifying criteria – The legislation as drafted prevents many companies, particularly in the mid-market and larger companies, from applying for a moratorium.
- Priority of debts in subsequent insolvency – If a rescue is not successful, the priority of pre-moratorium debt is altered in a subsequent formal insolvency and may result in certain unsecured debts being granted "super priority".
- Uncertainty as to meaning of financial services – It is unclear whether the "financial services" exception includes hire purchase or conditional leasing arrangements.
Restrictions on ipso facto (termination) clauses
This measure is considered to have brought certainty to dealings with suppliers but there is a lack of evidence as to its practical operation.
What has worked?
- Focus on continued supply – Companies in insolvency will not be "held hostage" by suppliers. This promotes rescue of companies as a going concern.
What could be improved?
- Trade credit insurance – Suppliers are unlikely to be able to rely on trade credit insurance as it is likely to terminate upon a company entering a formal insolvency process. A new trade insurance product might develop to cover supplies to insolvent companies but there is no market indication that this is the case.
- Hardship defence – It is unclear how the hardship defence will work in practice, or the associated costs.
- Suppliers may seek to avoid application of the measure – Due to the lack of protection offered to suppliers once a company enters a formal insolvency process, suppliers might seek to terminate their supplies early to avoid the obligation to continue once the company is insolvent.
For further details, please see the Interim Report.
